安富利 (AVT) 2021 Q1 法說會逐字稿

Welcome to the Avnet Second Quarter Fiscal Year 2020 Earnings Call. I would now like to turn the floor over to Joe Burke, Vice President of Treasury and Investor Relations for Avnet.

Thank you, operator. Earlier this afternoon, Avnet released financial results for the first fiscal quarter of 2021. The release is available on the Investor Relations section of the company's website. A copy of the slide presentation that will accompany today's remarks can be found via the link in the earnings release as well as on the IR section of Avnet's website.

Lastly, some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict, in particular, the scope and duration of the COVID-19 outbreak and its impact on global economic systems in our operation, employees, customers and supply chain. Such forward-looking statements are not the guarantee of performance, and the company's actual results could differ materially from those contained in such statements.

Several factors that could cause or contribute to such differences are described in detail in Avnet's most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this presentation.

Today's call will be led by Phil Gallagher, Avnet's Interim CEO; and Tom Liguori, Avnet's CFO. With that, let me turn the call over to Phil Gallagher. Phil?

Thank you, Joe, and thank you, everyone, for joining us for our first quarter fiscal year 2021 earnings conference call. Before we begin, I would like to start by thanking our employees for their continued hard work and dedication throughout the pandemic. During these uncertain times, our priority has remained ensuring the health and safety of all of our employees while keeping our business running as smoothly as possible. I am personally proud of the persistence and effectiveness they've shown.

Now turning to the quarter highlights on Slide 4. The recent months have continued to be a time of transition, both for the global economy, responding to the COVID-19 pandemic and here at Avnet, as we've taken actions internally to reinvigorate the business and best position it for the future. We have sharpened our focus on our primary components distribution operations while taking steps to accelerate the profitable growth of Farnell. An enhanced focus on these priorities is to the benefit of both supplier partners and end customers as well as the quarter reflects the initial results. Our renewed emphasis on execution as well as improving market conditions combine to drive revenue and adjusted diluted earnings per share, significantly above our prior guidance.

In the quarter, revenues were $4.7 billion, up both sequentially and year-over-year, and our adjusted diluted earnings per share was $0.36. Our business out of the Asia region benefited from industry tailwinds across a variety of verticals, most notably auto. We are pleased to see an improvement in demand in industrial and are further encouraged by the positive sentiments we're hearing from electronic manufacturing services customers as they look out into early 2021. While we are encouraged by our operational improvements and financial results, uncertainty still remains regarding the pandemic and how it will impact the global economy broadly and supply chain specifically in the coming quarters.

Looking at our core Electronic Components business on Slide 5. Revenues were up both sequentially and year-over-year in the quarter to $4.4 billion, and we posted sequential growth across all 3 geographic regions. As referenced earlier, we saw particularly strong growth results in Asia, our largest segment, which was up 22% sequentially on a constant currency basis. Note, this was aided by the extra week in the quarter. We exited the quarter with a positive book-to-bill; the Asia region, well above parity; the Americas above parity; and the EMEA region, a bit below parity, but above expectations with an encouraging trajectory coming out of September.

Really exciting is our design activity. It is at an all-time high for Avnet with design registrations at their highest levels since fiscal year 2018. And most importantly, we are seeing design wins in key vertical markets increasing year-over-year. Additionally, we are seeing an increase in lead times for certain components as the quarter progressed.

Specifically, we are seeing this increase for 5G-related products, automotive-specific products and certain popular products in the 32-bit microcontrollers area. Let me note that our backlog, which we continue to manage very tightly was strong and we're very pleased with our inventory levels. Our teams have worked with our customers to manage forecast and mitigate supply chain risk. They're watching the working capital just as we are, but their #1 focus is continuity of supply. This is exactly the value that Avnet brings to the table. The very core of what we do is to act as an extension of our customers' business to ensure they have a healthy supply chain. We're proud of the work we're doing in this regard during these challenging times.

Turning to Farnell on Slide 6. You'll see sales were up sequentially. They grew 13.3% on a constant currency basis. We continue to execute on our commitment to our Farnell segment. We added 28,000 SKUs to the 80,000 we already invested in over the past 12 months, making progress on our plans to add up to 250,000 SKUs through fiscal year 2022. We completed the rollout of our pricing optimization tool as part of our effort to improve the online user experience for our Farnell customers. And in similar vein, we made significant improvements to our e-commerce functionality.

Progress continues despite COVID-related challenges, and we continue to see great value in Farnell's opportunity to strengthen Avnet's digital footprint. Ultimately, this technology will allow us to better serve our customers and enhance the products we provide to them globally.

At this point, I want to address a question I have frequently been asked in the past few months: what are my strategic priorities for the company? On Slide 7, you'll see both our near-term priorities and the action we've taken since our last earnings call. Throughout the quarter, the team worked to define the organization's guiding principles and the strategic priority. We recommitted to focusing on our primary components distribution operations while continuing to strategically invest in Farnell.

As I noted earlier, the combination of Avnet's core competency and components distribution and Farnell's digital capabilities globally allow us to serve our customers and supplier partners efficiently and effectively, while also positioning us to drive revenue growth and generate greater operating margin.

Our highest priorities are to improve revenue growth and increased market share in our key target markets. We have made changes to our operations and processes to improve our profitability and return on capital metrics, while maintaining our global footprint to provide scale and operational support around the world. We are moving to a flatter organization with more regional authority, which will allow us to be more responsive to our customers and suppliers.

We cannot deliver revenue growth or capture additional share unless our relationships with our external partners remains a key priority. One way we do this is by making the world's largest communities of engineers, Hackster and element14, allowing customers to gain access to the latest insights and learn about our supplier partners' leading technology offerings. Our work in IoT and Avnet Integrated are in the service of bringing the best possible solutions to our customers. And we were pleased to have the opportunity earlier this month to host our Global Supplier VIP Summit where we recommitted to sustaining win-win relationships with our long-time supplier partners.

And because nothing gets done on paper, we have also worked to communicate our strategies and set up company-wide goals and expectations we can all get behind. Building upon our strong culture is the foundation of our next chapter. I am personally so proud of the culture we've built, one that values people that thrive in high-performance environment and that fosters employee engagement, invest in retention and commits to diversity. As part of our commitment to one vision, one mission and action as one team, we recognize the importance of engaging all our stakeholders and communities and our shared goal of creating sustained long-term value. Additionally, work is underway to ensure we're leveraging and extending our initiatives with regard to ESG, including disclosing our strong track record. More to come on this in future quarters.

Before Tom digs further into the numbers, let me summarize. We have recommitted to laser focus on execution and core components distribution. We are investing in Farnell's digital capabilities and leveraging IoT and Avnet Integrated to deliver greater value to both customers and suppliers. In parallel, we're aligning our structure to be more responsive to our customers and suppliers' needs and add to underpin to our strategy, building upon our culture to ensure we are positioned for success in the long term.

Now with that, let me turn the call over to Tom to report on the financials for the quarter. Tom?

Thank you, Phil. Good afternoon, everyone, and thank you for attending today's call. As Phil stated, our priority this quarter was to implement actions to sharpen our focus on our primary distribution operations. Specifically, to drive market share and revenue growth, improve our profitability through increased operating efficiency and earn a return on capital greater than our cost of capital. We made progress in each area.

Revenues grew to $4.7 billion, a sequential growth of 13.5%. The revenues were helped by the extra week. Adjusted to a 13-week quarter, revenues would have been $4.4 billion or a sequential increase of 6%. Revenues grew sequentially in all of our businesses, particularly in Asia. We controlled their operating expenses as our top line grew with OpEx as a percent of revenues, declining from 10.4% to 9.6%, and we continue to improve working capital, reducing working capital days to below 80 days. The lowest level since 2016.

Turning to Slide 10. You'll see these actions benefited our results this quarter. Revenues of $4.7 billion and adjusted EPS of $0.36 were both well above our guidance range. Cash flow from operations totaled $122 million, the eighth consecutive quarter of positive cash flow, demonstrating our team's execution in managing cash and working capital as we proceed through the economic cycle. We used the cash to reduce our debt to $1.36 billion and returned $21 million to shareholders with our dividend.

Looking at the income statement. Gross margin of 10.9% was down 49 basis points from last quarter due to the mix of higher Asia revenues as well as lower EMEA gross margins. Adjusted operating expenses of $451 million were up by $19 million sequentially, primarily due to the extra week. Adjusted to a 13-week quarter, operating expenses were approximately $431 million, a slight decrease sequentially, though on substantially higher revenues. Interest expense of $22.3 million continue to decline. It is now $11 million or 34% lower than a year ago due to lower debt. Foreign currency expense was $6.9 million this quarter, an unfavorable swing from the prior quarter as the euro and pound appreciated against the dollar. And our adjusted tax rate was 7%, the result of a favorable geographic mix of income and the U.S. CARES Act.

On Slide 11, we highlight results from our 2 business segments and our 3 geographic regions. Electronic Components revenue of $4.4 billion, increased 13.3% versus the prior quarter. On a normalized 13-week basis, revenues were $4.1 billion, a 6% sequential increase. All regions contributed to the growth. As previously highlighted, we were especially encouraged by our performance in Asia this quarter. Electronic Components operating margins were 1.9%, a 41 basis point improvement from last quarter as the higher sales volume more than offset the decline in gross margin.

Farnell revenues for the quarter totaled $341 million, up 16.7% sequentially and approximately 9% on an equivalent week basis. The segment had an operating margin of 3.5% in the quarter as anticipated in our guidance. We expect Farnell operating margins to slowly improve over the next several quarters as revenues recover and we add SKUs, improved e-commerce capabilities and control costs.

Our TI revenues this quarter were $241 million. We expect to complete the TI transition by December 31. Excluding TI and adjusting for the extra week, total Avnet revenues were flat year-over-year and up 9% sequentially.

Turning to cash, liquidity and the balance sheet on Slide 12. Our liquidity position remains strong. We ended the quarter with cash and equivalents of $483 million and with $1.5 billion of available lines of credit. Our gross debt leverage was 3.4 and net debt leverage was 2.2. Our net book value per share was $38, and our tangible book value per share was $30. While we are pleased with the progress made in the quarter, we recognize we have work to do on our profit margins and returns on capital. Our teams are focused on getting these to where they need to be.

Going forward, expect to see a continued focus on execution quarter-by-quarter, to grow market share and revenue, as Phil discussed, coupled with disciplined management of cost and working capital.

Let me spend a few minutes on the status of our operating expense and working capital initiatives. Let's begin with the operating expense. We announced the plan last quarter to reduce annual operating expenses by $75 million or $19 million per quarter. These savings are expected to be fully realized in our December quarter financials. Although we are experiencing some foreign currency headwinds, in the December quarter, we anticipate OpEx of approximately $425 million. The $75 million reduction is on top of the $245 million OpEx reduction plan we announced at our Investor Day 2 years ago. To date, we have achieved $204 million of the reduction. We have $41 million to go.

There are 4 projects underway that contribute the majority of savings: outsourcing various finance activities, migrating more work to our lower cost service centers, continuing to streamline our information systems cost and completing our Leeds distribution center. All of these are well underway, and the savings are expected to be realized by the end of calendar year 2021.

On the working capital side, we continue to work toward our plan of reducing working capital to the mid 70-day range. When we started this initiative, our days working capital were in the mid 90s. We've made steady progress and are pleased that this quarter, we dropped below 80 days. As each day is worth about $50 million, these efforts have generated significant cash flows, enabling us to reduce our debt this quarter to $1.36 billion, the lowest level since 2010, and to buy back 20% of our shares over the last few years.

While we expect to invest cash in inventory as the economy and revenues recover, we remain focused on our net working capital days target.

Turning to Slide 14. I will conclude with some comments about our expectations for next quarter. For our fiscal Q2 we are guiding revenue in the range of $4.0 billion to $4.4 billion and adjusted EPS in the range of $0.33 to $0.43. Compared to our first quarter, we are guiding the midpoint of revenues down due to TI rolling off. TI revenues included in our guidance are $40 million to $60 million. Excluding TI and adjusted for the extra week, Q2 revenues are forecast to be flat at midpoint. Let me reiterate, we expect to complete the TI transition by the end of December. In spite of the lower revenues, we are guiding higher EPS as our cost reductions are expected to improve profitability.

In summary, we will continue to take actions in line with our priorities. We are aligning our operations and processes to improve the top line trends and gain market share in key areas. We are also committed to enhancing profitability and our return on capital metric. These actions uphold our ability to generate cash and keep our balance sheet healthy and intact.

With that, let us open the line for Q&A. Operator?

(Operator Instructions) Our first question is from Adam Tindle with Raymond James.

Nice to see an upturn here continue. Phil, I just wanted to start, in the press release, you talked about fiscal '21 goals, improved top line growth, generate greater operating margin and adequate ROIC. I want to ask about the first 2 there. On improving top line growth, just to clarify, are you implying that for fiscal '21 that you'll see year-over-year revenue growth? Or are you saying that the declines will be less than the down 10% or so from last year and maybe just the drivers to that assumption?

Yes, Adam, thanks. If you net out TI, the answer to that, as we see it today, okay, is yes, okay? So when you net out TI. So the answer is yes. The things we're doing to drive that, the second part of your question, is really we're talking much about in the script. We're really looking to streamline the organization. We're driving the structure to align with the strategy. We have market share goals very clearly outlined. We are putting a lot of the businesses, if you will, at the forefront. In other words, as we streamline the structure, we're putting a lot more of the RNA, if you will, authority into the regions. We still have the global, obviously, leverage and scale that we bring from an Avnet standpoint, but really trying to push the business as close to the regions as we possibly can.

And as I talked a lot about, really critically aligning with our suppliers, okay? And then partnering with our suppliers. We had over 400 just a couple -- about a week or so ago in our supplier of VIP event. So working to -- we've always been aligned, but even stronger alignment with our supplier partners and making sure that upstream with them, we're driving downstream to our customers, the services and the value that they're looking for. So simplification, back to basics. We're proud to be a technology-enabled distributor. That's what we are. We're in the center of technology, and we see a real opportunity.

Okay. Maybe just as a follow-up, I'll ask then. The second goal of generating greater operating margin. As we kind of look at the moving parts, Farnell, would seem to be a big opportunity for you. But near term, as we look at numbers in the quarter, revenue grew by $50 million sequentially in the September quarter and operating margin was flat. So I guess, why isn't incremental revenue coming with better margin near term? And what changes that trajectory to get to that goal of generating greater operating margin for the company in fiscal '21?

Adam, it's Tom. As we go forward, revenue will help, obviously, right? That's operating leverage. We did add SKUs. We need to continue adding SKUs. We need the Farnell Leeds distribution center to get up and running really at 100%. That's been hit some headwinds with COVID and really the pandemic. And as that comes online, we'll start to see uplift in margins. We tried to be clear in the script. This is going to be a slow improvement quarter-by-quarter. We do, at this time, feel that we have leveled off in Farnell. And we do expect to see some uplift in the December quarter, and this is going to be quarter-by-quarter execution to get the operating margins back up.

Yes. Adam, I'll just jump on top of that. We're absolutely continuing to double down on Farnell, to Tom's point. We've had a few unexpected headwinds there, but we do have a trajectory to get to the operating margins, and we'll be resetting those with you over the next several quarters.

Our next question comes from Matt Sheerin with Stifel.

Just, Tom, regarding your outlook on SG&A, I think you said around $430 million. So backing into your net income -- your EPS guide, it looks like gross margin is going to be up fairly significantly, at least 100 basis points or so. Is that related more toward mix in terms of regions? Or does it also reflect the TI going away?

You answered the question, Matt. It's both of those. It's -- this quarter, we had strong Asia revenues. We also had -- TI is still healthier than expected, and both of those will help -- as those transition in the December quarter, they'll improve margins. The OpEx guide was $425 million for December, 4-2-5.

$425 million. Okay. Okay. Great. And then you got a -- it's still going to be up a bunch here. And then -- and just on that $425 million guide, you said you were at, I think, at $430 million run rate apples-to-apples in the September quarter, and you're looking for, I think, $19 million a quarter in savings from this latest cost cutting. Is that -- you're basically looking at sort of a $5 million savings. And is that because you're not going to realize that until you sort of exit the quarter? Or are there so many incremental expenses that factor in as well?

It's actually exchange rate or exchange rate assumption accounts for about a $10 million increase. So Matt, you're right. I think last quarter, we talked about once the cost reductions are in place, and they're in place today. So they're fully in place for the quarter, we'd be at $415 million, 4-1-5 million with the stronger euro, weakening dollar, that's increasing our OpEx by about $10 million. That make sense?

Okay. Great. And just lastly, Phil, if I can just ask a question just regarding your supplier relationships. I know there's been a lot of moving parts in the last couple of years or so. And the latest news is the Xilinx pending acquisition by AMD. And I know you've got a very strong relationship there with Xilinx as well as AMD. So any update on thoughts of that consolidation or other things that are going on that may be either beneficial or negative for Avnet?

Yes. Thanks, Matt. Appreciate that. Yes. Well, this is all hot off the press. There were some rumblings a few weeks ago. And our relationship with AMD is outstanding. Our relationship with Xilinx is terrific from Victor on down through the organization. So we feel there's very minimal risk here at this point in time. Actually, we think there's tremendous opportunity for us as these 2 companies continue to start building out the data center, the technology solutions they're looking to do to combine the best of both. So we think we're really well positioned here. As you said, we've been with Xilinx a long time. We're very self-sufficient. We've that major investments in the technical communities around the world for Xilinx and don't see any, at this point in time, any negative. Of course, it's been 2 days or not even, right? But we feel pretty positive about it.

Our next question comes from Ruplu Bhattacharya from Bank of America.

Maybe, Tom, can you talk about your capital allocation priorities, both in terms of what your plans are for the dividend? And share buybacks? And any thoughts on M&A? Is this the right time? Are you looking at targets? And what are you looking at?

Yes. In the near term, we're really focused on cash liquidity, Ruplu. And we do intend to support the dividend. That's a priority for us. The buybacks are on pause. They continue to be on pause until we see some certainty really with COVID-19 because that isn't ever-changing. I think your last part of that was M&A. We're not active in M&A. I think we've always said that near term, they would be smaller tuck-ins, probably more distribution, adding customers or suppliers we don't have or a product line we don't have. But nothing active. We're focused in the near-term on cash liquidity.

Got it. And then maybe just for my follow-up. A couple of quarters ago, you took a charge for goodwill intangible asset impairments. I mean can you address any concerns that investors might have on any further impairments that might be required? I mean, in your opinion, do you see any further impairments coming up or even in terms of write-down of receivables? Can you just talk to us about your thoughts on that?

Sure. Well, first of all, on receivables. Our working capital performance this quarter was really because of good collections. We actually added $200 million to inventory. We added SKUs. So collections are -- we're very positive. I know globally, people are concerned about has government support for smaller business dry up, that could be an issue. To date, we haven't seen any. I'm not trying to predict, but we haven't seen any. As far as goodwill and intangibles, yes, I know everybody is focused on Farnell. We're quite comfortable with Farnell. We see the value in Farnell. We see the path to recovery in Farnell.

We're -- we -- as Phil said, we're investing in Farnell. Farnell has a lot of leeway before we would be impairing intangible. So I can never predict the future forever, but we feel very confident on it. And I just want to be very clear. We continue to see high value in Farnell. We're the only people that do both high-volume distribution into the manufacturing side of the business as well as the upfront design chain, the engineering side of the business, the different value propositions. Farnell value proposition is you can buy anything and you can get it on your desk in 48 hours. That continues. And really our margin issues. Right now, they're in internal things that we need to correct and we'll get them on track. So that's a very good question. Thank you for letting us address that.

Our next question comes from Tim Yang with Citibank.

Your September quarter operating margins for those components and formula were lower on a year-over-year basis. These sales are actually higher on a year-over-year basis. Can you maybe just talk about how much of that declined from the mix? And how much of that is from the incremental cost with COVID.

Yes. I would say it's a little of both, Tim. And the way we view this is, when you look at gross margins on the electronic component side, historically, during macro pullbacks you do see some degradation in gross margin. And you do see it come back as the economy recovers. And that's the way we see electronic components. On the -- and of course, our Asia mix contributes to that as well. On the Farnell side, that makes us think that we have more under our control. It's less, I would say, at this stage, market related. And as I said to Ruplu's question, we have a path, we're confident, we're going to get it back.

Got it. Can you maybe just quantify how much of the COVID cost like you -- expenses like you spend like last quarter?

Well, we're not breaking them out anymore. But I would say it's in the upper single to $10 million range roughly. But we're not breaking them out because we're not really sure that they're nonrecurring anymore, right? We maybe have these. But the good news is we're managing them, we're dealing with it and we continue to hit our OpEx target, including them.

Got you. Can you give us an update on your TI replacement progress? I think several months ago, you mentioned that you are roughly 20% to 30% down. So given the vendor consolidation, it would be great if you can just provide some color on that front.

Yes, Tim, this is Phil. I'll take that one. So as Tom pointed out, we're in our last quarter effectively with TI, which is great. And we've been working and tracking, as we've talked in the past of 3 buckets really. We're tracking the [cross pin for pin], which is relatively a smaller number, frankly, with TI. And then we've got full demand creation well we're designing out the TI socket. You catch that in the next generation. So that tends to be a bit of a longer pole in the tent, takes a little bit longer. That's actually one of our biggest pipelines right now, though. So we're excited about that from a registration and design win standpoint with many of our other suppliers that are probably listening to this call is an exciting opportunity for them.

And then we got [share ship]. Customers are not enjoying being told where to go or where they have to go for business, so there's opportunity inside the customers to grow with other lines, okay? Otherwise -- by the way, in semiconductors and passive connectors, electromechanical. So we have a -- we're tracking it at the global level, regional level, by country, city, individual, and we've got a path. And what we said from day 1, roughly 2 years from that period of time, it's about 12 to 18 months in that period left to go to fulfill that gap being tracked daily.

(Operator Instructions) Our next question comes from Shawn Harrison with Loop Capital.

Congratulations on some improvement in results. I had a few questions. Phil, the design registration comment in the slides stood out to me, what was it the highest number since fiscal '18? Maybe if you could kind of just drill down on that. Why do you think it's so high? Where are you seeing that activity? And correct me if I'm wrong, but usually, it's probably what, about 18 months from when those really accelerate before you start to see some revenue from that?

Yes. Thanks, Shawn. Well, on the revenue from a design, there's registrations and there's design wins into revenue. So depending on the technology, with the low end control where we could be a lot quicker versus an SBGA, for example. But, yes, you're right, 12 to 18 months typically is to revenue. And I'll tell you, it's really exciting. We had our -- all the regional technical managers on a phone today. We have a monthly review with them, with our regional presidents and RTMs, and the activity is just extremely high.

I think what's happening is there's that much more accessibility. I think the other silver lining in this is there's that much more accessibility to our customers and the engineers at the customers and so much more can be done digitally. And I think it speaks to a lot of what we've done with putting digital design online. We talk a lot about our AVAIL tool, which our suppliers have embraced. So there's a lot more -- there's self-serve, plus the assistance with the FAEs. Then of course, we've got centralized tech support. So we've -- and some of the cost-effective geographies have beefed up over the last several years are, I'll call it, the deep dive technical support as well.

So I know on the surface that we can and you look at us and say, well, how is that happening? But I think it's the accessibility. You do a technical seminar today for a customer, lunch and learns, as we call them years ago, and they still call them that actually, you might get 10 or 20 engineers from a customer. Now you're getting 50 to 100 because they're all available and that much more accessible. So that's exciting. No, and we're seeing it, Shawn, in all regions. Again, we measure that. It's important to our suppliers. And if it's important to them, it's important to us, and we compensate our people on it. So yes, that's a pleasant surprise. And what also stayed -- is holding on is the design win revenue, okay? So not just the registration, but the design win revenue having -- if you have a little bit more stickiness, if you will, than the balance of the business, which is also positive.

That's great. And a two-parter around inventory, kind of looking at it 2 different sides. Maybe if you could talk about how you think your customers are in terms of their levels right now, given that took some lead times in moving out. And then I just wanted to clarify, I think on the slide, it said you had added 80,000 SKUs at Farnell already, another 28,000 this quarter. So that's 110,000 new SKUs and you want to get to 250,000 at some point in time. Just -- is that right? And kind of what's the dollar amount of -- so you have to put in place to essentially more than double the SKU count at Farnell?

The dollar amount was originally about $100 million. So we're about halfway there.

And that SKU count is the expansion of the SKUs to get the 250,000 expanding SKUS. Our total SKUs showing will be a lot higher than that, okay? That's just the expansion portion of it. Hopefully, that answers that question.

On the inventory overall, we're feeling very confident with our position in inventory. We continue to drive working capital. There's a lot of parts of working capital, AP, AR and inventory. So obviously, we watch all 3. But I talk -- pointed out in the script, we're working diligently with our customers. 50% of our business today is coming in or more on an MRP 4K sharing of sorts so just having even tighter cadences with our customers to be sure we got them covered. We're not seeing any major gaps. I think the inventory levels out there are in check. I think they're okay. We're confident with ours. And of course, we track that closely back with our suppliers. So we're feeling good about that.

And also the pipeline. So yes, I did mention it in the script, just to kind of put it out there. It's a mixed bag on lead times, Shawn. So it's kind of tough to -- it's not anything dramatic by any stretch of the imagination, but it doesn't take much with some of the constraints out there and some of the I'll call it, the back end with tests and some packaging that some of our suppliers have talked about that if there is a tick up, there could be some issues.

But right now, it's kind of a mixed bag. The high end controller seems to be the one that's going out the most or they're tied to 5G. The rest of them, they might be going out like 2 weeks, 4 weeks, something in those -- in that range. But I just threw it out there to say, "Hey, we're watching it closely." We want our customers to know we're watching that closely because that's part of the job that we have to do for them. Okay. Distribution, as you know, it's our job to see the picture with as few of the pixels filled in, right? So we're trying to constantly connect those dots.

Shawn, any other follow-up?

I'm good.

Our next question comes from William Stein with Truist Securities.

First, I just want to maybe follow-up on the last question to make sure I heard you right, Phil. I think the question was about customer inventory levels. I think the reason people want to understand that is in these sort of times of dislocations and questionable sort of supply conditions, and they see these big recoveries, everyone wonders if someone's squirreling away lots of inventory. Do you have visibility into your customer into your -- what is a very broad customer set, do you have visibility into their inventories? Are they building safety stock relative -- let's say, any more than they typically do?

Do we have a macro view into every customer out there and to see visibility into their end inventory? No. The answer is going to be no. Do we meet with them regularly and our account management teams and our supply chain teams meeting with them on a regular basis? Obviously, yes. And we get their forecast. So we can see the adjustments in our forecast, up or down. So to your point, no squirreling away. We pick up very quickly if we see an increase in demand from a customer that's using, hypothetically, 100 pieces a month. All of a sudden they order 1,000 or 2,000 of a part that might be starting to go. We catch that and we have the analytics to go back and reconfirm that with the customers.

But I was just in general, and I'm talking to a lot of the customers and all household names that you would know. And they're feeling pretty good. They don't -- I don't feel they're building up a lot of inventory. I think they've worked through since the pandemic, that March-April time frame, where we all had some of that concern has worked off. And then what we watch is also our cancellation rate. So we can see pushouts, pull-ins, things along those lines. And our cancellation rates are right in that 20%, 25% range, which includes pushouts and pull-ins, which is about right. I mean we're the shock absorber for the industry right? That's part of the role that we play. But we're not seeing anything that would incite or cause us to think that there's a building up of inventory out there.

Okay. That helps. One other topic relates to Premier and how it integrates with the rest of Avnet. Your predecessor used to talk about this concept where there were Premier customers and that business at low volumes translated to quite high margins for you. And then as the customers graduated to buying bigger volumes, they might transition to Avnet, where there was very significant step function, lower ASP and therefore, obviously, lower margin. And there was this concept of making it more of a sliding scale transition. Is that still part of the strategy with Premier? Is it done? Is it going a different direction? Any sort of update there would be helpful.

No, no, that's great. And this is still work in process, but we're excited about the opportunity we have there. So basically, well, you have the -- Farnell has got 1 million-plus customer/contacts and they got visibility into new product introductions, MRO, all kinds of different information. And what we're really doing is taking that information as appropriate and -- that the sales leader start up. We're kicking that through Marketo into CRM, which for both companies, Farnell and the core, if you will, are on CRM. And generating sales lead management out of that and doing prospecting. So that's a big piece of it.

The other big -- and that's exciting, by the way. And there's something going back the other way as well. As we add product lines -- as we mentioned last quarter, we added micron, as an example, on the Farnell, but they didn't have access to micron before globally. They do now because of the greater Avnet relationship, which is great.

The other one that we're seeing some really good opportunities is joint selling. We've got -- again, Farnell has a really broad line card, and we've got some major, major OEMs and EMS customers that we're doing business in, and we can leverage that relationship to bring Farnell in for a lot of the maybe lines we don't have, help with engineering services, new product introduction and the MRO stuff, okay? So we actually have programs put together where the 2 teams are working collectively, okay, to further penetrate to the greater Avnet, if you will, including Farnell, in some of these larger OEMs and EMS providers.

So that's really what we're doing. We haven't -- I know what you're talking about this graduation and no, look, that's more gray than black and white, okay? How that happens when those customers that grow up and when do they shift over to the core, if you will. That's not as much of a science as it might be in art. The other 2 are definitely science, in black and white, and we're managing that.

(Operator Instructions) Our next question comes from Gausia Chowdhury of Longbow Research.

Well, we have the book-to-bill and order trends by region into October. Can you just talk about how they compare to typical seasonality? You mentioned Europe was below 1 exiting the quarter. Has that improved at all? And then just wondering if there's any additional COVID-related shutdowns or restrictions that have impacted at all?

Yes. So I'll take that, Tom. So yes, and we talked to that in the script and the book-to-bill is improving through July, August, September quarter in all regions. Europe was not at parity for the September quarter, but as noted, they were a good trajectory coming out of the September quarter. And as we sit in October, globally, we're sitting in a positive book-to-bill, so including Europe.

As far as the COVID-related shutdowns or adjustments, we -- all of our -- and we've been proud of this and proud of the teams and the frontliners, for sure, all of our logistics centers are up and running. We've not had 1 day where they've been shut down at all. So that's a positive and that still continues. As everyone knows, we're seeing upticks in cases, and we are seeing that in Europe. And right now, we're managing through that.

We don't have any planned shutdowns necessarily. We are being very careful how we bring our employees back to work, okay? I shouldn't say -- let me check that. They're working back to the office, okay? And we're making it very optional at this point in time in Europe. We have actually reduced the percentage of the people we will allow in a building. And in the Americas, we're looking over the next couple of weeks to possibly start making that optional as well. But primarily, it's the safety of the employees and it will be their choice, 100%. And outside of that, we've not seen any other real negative effects yet to the increase in the COVID.

Okay. And then with regard to the 70 -- the mid 70-day working capital target, what kind of time line should we consider for that? And then can you rank the levers that you'd pull to get there? Is it primarily accounts receivable? Or if you could just rank that, that would be helpful.

Sure. That would be the end of calendar year 2021. And it's really -- it's a disciplined process. There's no one item that's going to get us there. It is a mix of continued focus on receivables, payables and inventory. We have a very disciplined process here every week. We're getting forecast from our businesses on their working capital. We meet as a management team every week on it. Every other week, we're meeting with the business presidents. So I say that because we don't have a rank order of things that have to happen. We know where we have gaps that we can improve. And it's an execution, an execution story. It's been an execution story for 18 months. It's going to be an execution story for the next 4, 5 quarters. Thanks for the question.

Thank you. There are no further questions at this time. I will now turn it back to Phil Gallagher for any closing remarks.

Great. Thank you very much, and thanks again for all the participants. Let me just end my comments by acknowledging we're excited about an upcoming milestone in Avnet's history. On calendar year 2021, we will be celebrating Avnet's 100-year anniversary. Again, really excited about that. You'll be hearing a lot more about it. But as Avnet approaches its 100-year mark, I couldn't be proud of all that we've achieved. Like any business, we've had certainly some ups and downs and ups and down cycles. But over the years, we've stayed close to our customers and suppliers and remain nimble with our execution. And our longevity demonstrates our ability to maintain technological innovation and financial discipline.

So once again, I want to thank our employees for their continued hard work and dedication throughout the pandemic in all prior phases of Avnet's journey. I'm truly grateful to be surrounded by some of the most talented people in the industry, and I'm excited for what the future holds for Avnet. So with that, again, I want to thank you all for attending today's earnings call, and I look forward to speaking to you again in January with our fiscal second quarter earnings report. Stay safe and be well. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.